Introduction
BHP being one of the major suppliers of minerals
in the world and operating in multiple jurisdictions, it has exposed itself to
a greater economic, political, socio-cultural and environmental risk. Together
with the complexity of the business operations (ASA 315, 2015) , these controllable and uncontrollable
risks have pose an immense pressure on the entity’s
management or those charged with governance in achieving its objectives and strategies. In this regard,
the business risk, as defined in ASA 315.4 (b), is identified and assessed in the following section.
1 Samarco Mining Disaster
1.1 Identification of Business
Risk
On 5th November 2015 Samarco[1]
mine in Brazil failed resulted in killing 19 people and sweeping three
communities in a deluge of mine tailing (ABC
News, 2017) and further affecting the 260,000 people (Wainwright, 2015) of the downstream
and the environment of Rio Doce basin (BHP,
2017; BHP, 2016; ABC News, 2017).
During the current financial
year BHP and the Fereral Procecutors entered into an agreement to settle USD
53.6 Bn (BHP, 2017) to compensate for
the loss and BHP charged with both criminal and civil law suites for their part
in negligent business operations. The courts suspended the cliam during the
financial year (BHP, 2017) and after the
balancesheet date the trials were resumed the murder tials against BHP (The
Sydney Morning Herald, 2017) . This incident has cuased BHP to face
multiple litigations by the government of Brazil, individuls and
non-governmental organizations causing at least USD 53.6Bn and a loss of
reputation. Not only the loss of revenue and inability ot achive objectives of
BHP poses risk to the business, but also “flaws in a product or
service that may result in liabilities and reputational risk” (ASA 315, 2015, pg. 23).
2.1.2
Assessment of Business Risk
Financial year 2017 is the second year of
reporting after the disaster. This incident could lead to risk of material misstatement
since it has a direct impact on the financial statement, especially, BHP has
made a provision of USD 1.057 Bn in the Financial Statements for the year 2017.
However, as per the later conclusions reached by the courts the compensation
could reach up to USD 53.6Bn. Further, as a part
of the audit procedures, the auditos should assess the adequacy and the
relavance of the disclosure pertaining to the incedent. Since BHP follows the
equity mthod of accounting for the jontventure of Samarco and this incident could
have an advserse effect through impairment.
On the otherhand, the
management has not reached a conclusion as to whether the dam to be reopenned
causing a doubt on the continuity. Samrco, which was producing
14.5 Mt of pellet Pellets and were independently marketed and sold to 19
countries prior to the disaster and contributed nearly 9% to the total iron ore
business (BHP, 2015) . Though the cesation
of the dam will significantly affect the financial statement as a whole, it
will not impact on the going concern of the business.
2 Dispute with ATO regarding
the Transfer pricing
2.1
Identification of Business Risk
As per section A40 of ASA 315, regulatory requirements
could cause a business risk. The
cross border transactions inherently caused the company to have tax legislative
dispute over different tax authorities. In particular, BHP is currently being
audited by Australian Tax Office (ATO) for the alleged tax evasion through the
transfer pricing scheme between BHP Australia and Singapore marketing hub (Khadem, 2017a ; Khadem, 2017b). The total
dispute and the penalty interest have accumulated to USD 1 Bn which has not
been resolved yet.
Further, ATO has released a transfer pricing
guidelines early 2017 and this could have a risk that BHP is compelled to
abide by that law and could result in settling USD 1 Bn tax settlement.
2.2
Assessment of Business Risk
The financial consequence of the ATO tax
dispute will have an impact on the financial statements, thus, the auditor
should focus on the individual account balances, the classes of transactions
and the relevant disclosure requirements of the tax litigation.
3 Political Risk
3.1
Identification of Business Risk
BHP has expanded their operations and customer
base to developing countries which has given rise to additional risks on
compliance with regulatory and environmental legislative requirement, risk
relating to bribery and corruption, civil wars and terrorism and delays and
disruptions in the operations.
3.2
Assessment of Business Risk
“Most
business risks will eventually have financial consequences and, therefore, an
effect on the financial report” (ASA 315, 2015,
pg 23). On the financial statement level, these risks together with the
exchange rate risks will have an impact on revenue and receivables and
ultimately on the profitability.
4 Labour dispute in Chile
2.4.1
Identification of Business Risk
Due to the dispute between BHP and the labour force
in Chile, the company lost USD 1Bn (18%) revenue and the operations were ceased
for 44 days. This dispute has occurred since BHP resort to reduction in cost by
cutting costs relating to labour contracts in order to cope with the aftermath
of China-led commodity boom (2002 -2012).
4.2
Assessment of Business Risk
This dispute is not a one off incident which
resulted in loss of revenue for the current period. Chile government has
introduced a new legislation which has caused higher risk of operational
stoppage, increased in cost and reduction in efficiency (BHP, 2017) .
Though the conclusions reached by both parties were not up to their
satisfaction after the government intervention, the labour union agreed to
resume negotiation with BHP on the new contracts in September 2018 (Sanderson & Hume, 2017) . Thus, the labour
dispute will continue for the next financial year resulting in an interruption
in business operations.
5 Deterioration in credit
rating
5.1
Identification of Business Risk
Due to the loss of revenue from the Samarco, labour strike
and the sump in the prices of commodities BHP credit rating has decreased from A3 to A1
according to rating by Credit ratings agency Moody and the debt rating has
decreased from A+ to A according to the debt rating by Standard & Poor
(The Australian, 2017) .
5.2 Assessment of Business Risk
The deterioration of the credit ratings could increase the interest cost from the debt securities and also this could
adversely affect the cost of capital. BHP employs cost of capital is used to
discount the future production volumes to assess the impairment of non-current
assets. Since non-current assets and the depreciation thereon are a major part
of the financial statements the interest cost could result in a material change
in the financial statements. Currently the firm uses 7% however, this could be assessed
independently by the auditors for its relevance and reliability.
References
ABC News. (2017, January 20). BHP
Billiton and Vale failing Samarco dam disaster victims: UN adviser. ABC
News, pp. 1-2.
ASA 315. (2015). Identifying and
assessing the risks of material isstatement through understanding the entity
and Its environment. Commonwealth of Australia: Australian Auditing and
Assurance Standards Board (AUASB).
BHP. (2015). Resourcing glabla
growth, Annual Report. Melbourne, VIctoria: BHP BillitonLimited.
BHP. (2016). BHP Annual Report.
Melbourne, Victoria: BHP Billiton Limited.
BHP. (2017). BHP Annula Report.
Melbourne, Victoria: BHP Billiton Limited.
Khadem, N. (2017, May 16). ATO
ramps up hunt for multinationals using cross-border finance. The Sydney
Morning Herald, pp. 1-6. Retrieved January 12, 2018, from
http://www.smh.com.au/business/the-economy/ato-ramps-up-hunt-for-multinationals-using-crossborder-finance-20170515-gw4zae.html
Khadem, N. (2017, September 21).
BHP willing to head to court against ATO tax bill. The Sydney Morning
Herald, pp. 1-6. Retrieved Janury 12, 2018, from http://www.smh.com.au/business/mining-and-resources/bhp-billiton-willing-to-head-to-court-against-ato-tax-bill-20170920-gyl5qk.html
Sanderson, H., & Hume, N.
(2017, May 2). BHP Billiton has no regrets over $1bn fight with Chile
workers. Financial Times, pp. 1-4. Retrieved from
https://www.ft.com/content/5a767dc2-2a90-11e7-bc4b-5528796fe35c
The Australian. (2017, March 4).
Moody's downgrades BHP debt. THE AUSTRALIAN, pp. 1-2.
The Sydney Morning Herald. (2017,
November 14). Brazil resumes murder trial in BHP-Vale's Samarco mining
disaster. Business, pp. 1-2. Retrieved January 10, 2018, from
http://www.smh.com.au/business/mining-and-resources/brazil-resumes-murder-trial-in-bhpvales-samarco-mining-disaster-20171114-gzku7y.html
Wainwright, R. (2015, November 20).
Samarco mine costs will make for more than one ‘difficult year’ at BHP. The
Conversation, pp. 34-36.
[1] Samarco is a jointventure of BHP, having 50% ownership and BHP
applies equity method of accounting for the reporting of the jontventure. BHP
has the rights to assets and obligations to the liabilities of Samaco but not
the ownership (BHP, 2017)
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